Are we ripe for another market collapse?

Published: Friday, September 20, 2013 at 03:10 PM.

The proper role of government is to provide oversight, enforcing sensible rules that protect consumers and investors. The proper role is not to backstop loans up and down Main Street. Such sweeping guarantees undermine market discipline and encourage risk-taking.

Banks and other regulated financial institutions should be the primary source of mortgage credit. They should reap the benefit for making profitable loans, and bear the burden for losses.

Congress pays lip service to the idea of avoiding another round of financial-industry bailouts. Many lawmakers say they agree in principle that they need to wind down Fannie and Freddie. President Obama endorsed exactly such a move in a speech last month, saying the era of bailouts is over: “And we’re ending those days,” he said. “We’re not going to do that anymore.”

Yet our leaders, from the president on down, haven’t delivered. Legislation known as the PATH Act that would start winding down Fannie and Freddie has stalled in Congress. The reason most often cited for doing nothing is the need to protect fragile green shoots sprouting from debris of the housing bust. The real-estate market is so fragile, the theory goes, that it couldn’t possibly survive without government life support.

Nonsense. The real-estate market would be stronger if the feds stopped doing the job of banks and private investors. The upshot, however, would be unpopular in the short run: Loans only would go to qualified buyers. In other words, the American dream of homeownership would be available only to those who could afford it based on their creditworthiness, not the U.S. government’s.

More Americans would rent. Fewer of them, though, would be vulnerable to devastating foreclosures when they encounter job losses or other financial hardships.

Minutes before 2 a.m. on Sept. 15, 2008, Lehman Brothers became the biggest U.S. company ever to file for bankruptcy. The collapse of this New York investment bank five years ago touched off a panic that sent the stock market down — and the housing market down and out for years.

A bubble in the real-estate market, after inflating for a decade, went pop. Values plunged for the most important investment held by everyday Americans as housing suffered its worst implosion since the Great Depression. Prices are rising again, but hold the celebration: Conditions that enabled the bust, and the collapse of Lehman, persist today.

Some of the same risky securities that helped drive Lehman into bankruptcy are staging a comeback on Wall Street. The federal tax code, with excessive mortgage-interest and property-tax deductions, still encourages Americans to overspend for big homes. Speculative fever, with houses flipping as if they’re commodities on the Chicago Board of Trade, is rekindling in a few hot markets.

And you, taxpayer, are guaranteeing practically every transaction.

That’s right: If a real-estate bubble goes pop — again — Uncle Sam will be left holding the bag — again.

For all the reams of new rules being dreamed up in Washington to prevent another collapse, the nation’s political leaders haven’t acted on a key lesson of the bust: They have failed to get the government out of the mortgage market.

The two quasi-governmental companies at the center of housing finance live on. If anything, Fannie Mae and Freddie Mac are more central to the housing market than ever. The government guarantees nine of every 10 mortgage loans being made in the United States. The full faith and credit of the U.S. Treasury — that is, of you, U.S. taxpayer — backs that guarantee. If the loans go bad, it’s bailout time again.

The proper role of government is to provide oversight, enforcing sensible rules that protect consumers and investors. The proper role is not to backstop loans up and down Main Street. Such sweeping guarantees undermine market discipline and encourage risk-taking.

Banks and other regulated financial institutions should be the primary source of mortgage credit. They should reap the benefit for making profitable loans, and bear the burden for losses.

Congress pays lip service to the idea of avoiding another round of financial-industry bailouts. Many lawmakers say they agree in principle that they need to wind down Fannie and Freddie. President Obama endorsed exactly such a move in a speech last month, saying the era of bailouts is over: “And we’re ending those days,” he said. “We’re not going to do that anymore.”

Yet our leaders, from the president on down, haven’t delivered. Legislation known as the PATH Act that would start winding down Fannie and Freddie has stalled in Congress. The reason most often cited for doing nothing is the need to protect fragile green shoots sprouting from debris of the housing bust. The real-estate market is so fragile, the theory goes, that it couldn’t possibly survive without government life support.

Nonsense. The real-estate market would be stronger if the feds stopped doing the job of banks and private investors. The upshot, however, would be unpopular in the short run: Loans only would go to qualified buyers. In other words, the American dream of homeownership would be available only to those who could afford it based on their creditworthiness, not the U.S. government’s.

More Americans would rent. Fewer of them, though, would be vulnerable to devastating foreclosures when they encounter job losses or other financial hardships.

Washington’s failure to get the government out of this market invites a housing bubble that may be reinflating. In the name of homeowners and taxpayers victimized by the Great Recession, Congress and the president should make sure that doesn’t happen again.